Specialized strategies: weighing the benefit of non-qualified deferred compensation.


Non-qualified deferred compensation plans are retirement plans that supplement qualified plans, such as pension plans or 401 (k) plans. They resemble qualified plans in that you put some of your compensation into the plan for a specified term, during which it can grow without taxes being due.

These "non-qual" plans can be structured in a variety of ways. They may be voluntary or mandatory, and some employers may match all or a partial amount of the money you put into them. Their time frame can vary, and so can the assets held in them. Some plans allow you to invest only in company stock; others provide a broadly diversified portfolio of securities, while others offer only low-risk assets such as Treasury bonds, and so on.

It's important to note that you must state in advance when you will take out the money and whether you will receive it in a lump sum or installments. Non-qualified plans may also have a vesting period; if you leave the company during this time, you forfeit the unvested portion.

Non-qualified deferred compensation plans are attractive because they allow you to defer a portion of your pay into an account that is invested and can grow for many years--before taxes. The financial benefits of this tax deferral can be considerable.

To assess the potential benefit, we modeled the likely outcome of two $100,000 pay packages, one in traditional, taxable compensation and one in a non-qual plan. To make an accurate comparison, the traditional compensation starts with less--because it gets hit with taxes right away. In the case of an [Image] executive subject to top marginal federal tax rates and 6% state tax, the post-tax amount comparable to $100,000 would be $56,776.

Deferring Taxes Can Really Pay Off years 5 8% 10 18% 15 29% 20 41% 25 54% 30 70% Note:Table made from Bar graph Bused on Bernstein's estimates of the range of returns for the applicable capital markets over the next 30 years. Data do not represent past performance and are not a promise of actual future results or a range of future results, for comparability, the tax-deferred portfolio is assumed to be transferred to a taxable portfolio and the taxable portfolio is assumed to be liquidated and taxed each year displayed. See Notes on Wealth Forecasting System, page 44, for further details. Source: Alliance Bernstein Given that the deferred account starts out with almost twice as much value and pays no taxes on investment gains along the way, it's not surprising that it...

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